Do
companies really know what it costs them to hire a new IT employee?How does that compare to the price of
retaining an existing team member?Many companies shy away from the idea of implementing a formal retention
plan because they fear it will cost too much and take too much effort, but could
that tedious and sometimes costly process really save the company time and money
in the long run?

On
average IT professionals change jobs every 2 to 3 years.Younger professionals tend to change
even more frequently, and in many cases they opt for project-based work as
opposed to long-term employment altogether.This constant churning, which is in
large part caused by the ever-changing nature of the industry, leaves most
companies in an endless battle against turnover in their IT department,
regardless of market conditions.

The
Importance of the Issue Today

As an
IT manager, you work hard to add value to your business by providing
revenue-generating or cost-saving systems.With global demand for products and services at an all-time high, the
need for increased productivity is immeasurable.Therefore, the strategic importance of
the IT department has never been greater, and it is vital, now more than ever,
that you are able to find and retain the best staff
possible.

Unfortunately,
as the need for skilled IT workers increases, the supply continues to
dwindle.In a recent article, CIO Insight reported that “joblessness
among American IT workers averaged 2.1 percent (in 2007), down from 2.5 percent
in 2006.That's the lowest
unemployment rate for IT (professionals) since the government began using the
current method to track employment in 2000, when IT joblessness stood at 2.2
percent.”[1]Considering that most economists
consider an occupation to be at “full employment” when its unemployment rate is
at or below 4.5 percent, these statistics indicate a real problem for the
industry.

Today’s
IT managers are finding it nearly impossible to locate well-qualified IT
professionals who are readily available for hire.As a result, IT managers are going to
great measures to recruit top workers away from other companies.This has led to a major increase both in
the amount of churning within the industry and turnover rates across the
board.

Total
Cost of Hiring

So
what is turnover costing your company?When employees leave, there are two types of costs you must consider in
replacing them.The first of these,
direct costs, is easily measurable.Direct costs include things such as job ads, external recruiting fees,
sign-on bonuses, salary increases, and other costs related to the hiring of the
new employee.

Secondly,
indirect costs, which are more related to the loss of the existing employee, are
typically more difficult to calculate.They include such things as loss in training.When an employee leaves, he takes with
him all the skills and knowledge which were acquired at the cost of great time
and expense to the company.In
addition, when the IT department is running understaffed while management
searches for a replacement, the loss of productivity comes at a huge price.If the company chooses to hire
consultants to help with the workload in the interim, there is a hefty cost
involved as well.If an employee’s
leaving is caused by a major management issue, there may be costs associated
with the decline of the other team members’ morale, or even worse, the company
may lose multiple employees at once.

Studies
show that the actual cost of replacing an employee can amount to more than three
times the employee's annual salary depending largely on the time it takes to
fill that position.Furthermore, as
we discovered in our own research, direct costs alone can account for nearly 80
percent of a position’s annual salary.Part of that amount goes toward the increase in base compensation
required for the new employee.Experience shows that when hiring a new professional to replace an
existing employee, you should plan on increasing the position’s salary anywhere
from 12 to 15 percent.In a scarce
labor market like that of today, you should anticipate the increase to be as
much as 30 percent if you want to attract top talent to your company.In some cases you may find yourself
paying a higher salary for a professional with weaker skills, but that is the
price you pay for turnover.

Another
large chunk of the direct costs goes toward external recruiting fees.You may think that by relying simply on
internal recruiters you could save your company a great deal of money.Unfortunately, that is not the
case.The average time it takes for
JDA to fill a position using our structured search process is about 30
days.On the other hand, it takes
most of our clients over six months to find a viable candidate to fill a
difficult position such as SAP or 11I.Keeping in mind that time is money, the longer it takes to hire a
replacement, the more it will cost your company.In the majority of cases, JDA’s
recruiting fees are greatly offset by the reduction in the time it takes for us
to fill your position.

Applying
the statistics we’ve provided thus far, the direct costs of replacing an
employee who makes $60,000 per year would equate to over $49,000.When added with indirect costs, you can
expect that the total cost of hiring will total $150,000.Let’s take a look at how that is
possible.

-Approximately
7 candidates will be interviewed before finding the right person for the
job.

-Each
candidate will require 3 hours of the hiring person’s time during the
process.

-External
recruiting fees will be 33% of the new annual base
salary.

-Pre-emptive
testing for the chosen candidate will be $100.

-The
base salary for the position will get an average 12%
increase.

-The
new employee will receive an average bonus of 5% of his or her annual base
salary.

-An
average relocation fee of $5,000 will be offered and
taken.

-The
new employee will receive an average of 2 hours of training per day for
the first 6 weeks.

-Training
materials for this person will cost $1,000.

-The
person responsible for training the new employee is worth $100/hour to the
company based on typical
productivity.

A Better
Alternative

With the cost of hiring so significant and the effect on
company morale so long-lasting, it is understandable that companies and managers
are constantly looking for a viable alternative.Often times after examining real
numbers, many find themselves open to the possibility of employee retention as
opposed to employee replacement.

TOTAL Cost of
Retention

In
developing an effective retention strategy you must include both monetary
rewards and non-cash incentives.While this may cost the company some money, the expense is typically
minimal in comparison to the burden of hiring a new employee.

Show Them the
Money

Standard monetary rewards include salary increases and
performance bonuses.From
experience, we know that annual raises traditionally range between 4 and 6
percent of the employee’s current base salary, and bonuses range between 6 and
10 percent.Often times, when our
clients are looking for ways to retain their staff, we encourage them to adjust
their salaries to just above the going rate.In doing this, we also encourage them to
let their employees know that this is their way of showing the real value each
employee brings to the company.

While most companies understand the need to retain
employees through monetary means, many have a greater need to keep the company’s
fixed costs to a minimum.If this
is your issue, quarterly bonuses can be used as a company-wide performance
incentive or as one-off rewards for employees that go above and beyond.This too will allow you to increase your
employees’ overall compensation without adding a permanent amount to their
annual salaries.Furthermore,
quarterly bonuses are recommended over year-end bonuses as a way to avoid
potential mass-exiting of employees who may wait until year-end bonuses are
awarded before tendering their resignations.

Develop
Creative Incentives

In
addition to monetary compensation, employees today put great emphasis in both
their overall quality of life and their career progression.Therefore, it is important that
companies provide creative non-cash incentives that help keep their employees
happy while helping to further their professional development.Examples of non-cash incentives
include:

Flexible
Scheduling

In recent years, flexible scheduling has become a very
popular way to retain employees.Some companies will require employees to work a certain number of hours
in a week, but allow the employee to choose the exact times.Other companies will allow their
employees to work 10-hour days Monday through Thursday in exchange for Fridays
off.Many companies will simply
implement the policy of flex-time meaning that employees can exchange overtime
one day for time off another.Any
way you put it, flexible scheduling gives employees more quality time with
friends and family which leads to greater happiness, and ultimately happy people
make better employees.

Telecommuting

In addition to flex scheduling, many companies today
allow employees to telecommute.This helps cut down on the amount of time employees must spend in their
cars each day.With the price of
gas going up and the realization that long commutes are the number one reason
for resignations, this strategy alone could prevent many employees from leaving
your company.

Show
Appreciation

At some point or another every one of us needs to be
told we are doing a good job.Your
employees are no different.As
managers we often use encouraging words to make our new employees feel welcome,
but often we forget that our long-term employees need affirmation as well.Flattery is great, and it’s free.In addition to kind words, you can also
show your appreciation with occasional gift cards to an employee’s favorite
restaurant or tickets to a new show in town.Just keep in mind that if employees go
long enough without knowing they are valued, they could start looking elsewhere
for assurance.

Better
Benefits

Every employee likes benefits.One way to retain long-term employees is
to increase their vacation time.While there is a minimal cost associated with time off, it is typically
offset by the fact that when employees get enough rest, they return to work more
motivated and productive than before.For newer or part-time employees, you may decide to implement or enhance
their medical benefits package.The
cost associated with this strategy is typically offset by the idea that you will
have healthier employees.

Career
Path

Career progression is very important for most
employees.Therefore, it is
important to establish clear and precise career paths for all IT personnel in
your company and to ensure that each is made aware of the rewards and
requirements.Nothing is worse than
going to work every day with no direction or motivation.If your employees know exactly what must
be done to get to where they want to go professionally, and they have seen it
work for other employees in the company, they will be more likely to stay with
your company and to work hard while they are there.

In developing career paths for your employees, it is
important that you consider all the options.In visualizing career paths, most people
automatically think of vertical movement which is when an employee is promoted
up the chain of command to a level of greater significance and more
responsibility.Many employees are
looking for that type of advancement, but in some cases horizontal movement is a
better option.Horizontal movement
consists of an employee transferring to another position within the company that
is equal in significance and responsibility to his or her current position but
typically involves learning new technologies or processes.In other cases, the best move for an
employee may be outside your company, which is sometimes called external
movement.Given that option, you
may be asking yourself how external movement could possibly help in reducing
turnover for your company.

Let’s consider the example of Lou Holtz.For years he was the head coach of the
Notre Dame football team, and he is considered by many to be one of the best
coaches of all times.Why is
that?Lou took it upon himself to
constantly search for coaching jobs outside of his organization so that his
assistant coaches would have the opportunity to further their own careers.He knew that the only way they could
advance with Notre Dame was if he left the team, and he knew that wasn’t going
to happen anytime soon.As a result
of his looking out for his employees’ best interests, many in football had
dreams of working for Lou.

In another example, JDA recently contacted one of our
clients with a CIO opportunity which we thought he might be interested in
pursuing.He informed us that his
plan was to stay with his current company until retirement, but insisted that
his second-in-command might be a perfect fit.Again, our client knew that this
employee had no chance of advancing his career in his current position, so he
found an opportunity for that person externally.While the employee did not get the new
position, our client won this individual’s respect and loyalty by showing a
genuine interest in his future.

Training

While most employees are interested in career
advancement, they are also interested in expanding their knowledge base.Therefore, providing ongoing educational
opportunities is a great way to encourage employees that your company is the
best place for them.Whether you
provide training opportunities which allow them to better do their current job,
or you pay for their formal education which will impact their performance in a
future position, it is a win/win situation for both the employee and the
company.The key here is that
employees be able to use what they learned to improve the effectiveness of their
job performance.

Additional
Exposure

In addition to formal training and education, most
employees enjoy being exposed to new technologies and procedures within the
company.This is good for employees
because they often get bored with repetition, and it is good for you as it
broadens the employees’ level of value to the company.

Communication

Most employees do not like surprises, and they don’t
care to hear major news which might affect them via the company newsletter or
the company rumor mill.For this
reason, it is important that you keep your employees informed of what’s going on
within the company.You can take
this concept one step further and actually ask for your employees’ input and
ideas on upcoming projects, being sure to follow up later and let them know
whether or not you have opted to use their ideas and why.

It is also important that you let your individual team
members know how they are doing as employees.It is not enough to discuss their
performance in an annual review.As
questions or problems arise address them with the employee directly and
immediately.This will keep any
small nuisance from becoming a major disaster.

As
you can see, there are many options from which to choose when developing a plan
for retaining your employees.Looking at all the retention tools available, both monetary and non-cash,
let’s calculate what it would likely cost to retain the same $60,000-per-year
employee whom we discussed replacing in the previous scenario.

All
numbers in this scenario are estimates based on our experience.The following are our
assumptions:

-In
order to retain this employee, you have chosen to implement an
above-average 10% adjustment in the employee’s current annual base
salary.

-You
have also chosen to implement an above-average bonus equivalent to 12% of
the new annual base salary.

-The
employee earns the full bonus.

-Also
in an attempt to retain this employee, you choose to add each of the
non-cash incentives we discussed to the employee’s current total
compensation package.

-Flexible
scheduling is free as it is simply an exchange of
hours.

-The
cost of telecommuting will include only a laptop and a year’s worth of
internet access.

-You
will purchase $100 worth of employee appreciation items over the course of
the year.

-With
a $66,000 annual salary, the employee’s hourly rate is
$31.73.

-You
will give the employee one week of additional vacation which is equivalent
to 40 hours.

-The
cost of implementing a career path for the employee is virtually
free.

-You
will send the employee to one training course per
quarter.

-The
average cost of a training course for this employee is
$1,000.

-Any
cost associated with additional exposure for this employee will be offset
by the employee’s increased productivity and value to the
company.

-The
cost of communicating with this employee is
negligible.

In this scenario, the total cost of retaining the
$60,000-per-year employee is $128,210 less than the estimated cost of replacing
him.Stretch that number out over
several years, and the difference would grow exponentially.

IMPLEMENTING
A PLAN

The
answer is obvious; the most cost-effective and productive way to deal with
today’s increasing turnover in the IT industry is to implement an effective
retention plan. But, before you get
started there are a couple things to consider.

First of all, it is unfortunate that you must realize
you will have neither enough time nor money to save all of your employees.For that reason, it is important to
approach your retention strategy as you would a disaster recovery plan.When planning for a disaster, companies
must decide which are the most vital components to their business and
concentrate the bulk of their efforts on those items.In this same way, it is important that
you implement the top-grading process when deciding which employees are the most
vital to your business.The top-
grading process enables you to rank employees or potential employees based on
the value they bring to your team and the organization.The employees that are A candidates or
considered your top-tier are those without whom your company could not easily
survive such as key decision makers, top performers, and those with the most
institutional knowledge.The bulk
of your retention budget and efforts should be focused on those employees.For employees in the middle- and
bottom-tier or considered B or C candidates, it is definitely worth your time
and money to expend some retention efforts, but perhaps in a more limited
amount.As harsh as ranking may
seem, it is the only way to effectively and realistically implement your
strategy.

Once you have sufficiently ranked your employees, you
will want to develop separate retention plans for each of your tier groups which
involve varying amounts of time and money.Let’s say you have three tiers.You may choose to implement all or most of the retention strategies we
discussed earlier for those critical employees in your top tier.For those in your middle-tier, you may
increase their bonus percentages, introduce flex scheduling, and offer some
additional training.For your
bottom-tier employees, you may just offer additional training and exposure which
would give them the opportunity to move up in your ranking system in the
future.

In
addition to customizing your strategy for each tier, it is important to make
your retention efforts personal and direct for each employee.Keeping in mind that each of your
employees has different goals, different needs, and different motivations, it is
important that you take the time to find out what drives them personally and use
those ideas specifically to retain them.When you meet with your employees to discuss these issues, whether it is
on an annual basis or more frequently, let them know you are developing a
retention strategy specifically for them, explain what you think it should
entail, ask for their input, and let them know why it is important that they
stay with your company.Again, you
will want to spend more time in developing individual strategies for your
top-tier employees, but it is important that you understand and acknowledge your
other employees as well.

A
few strategies you could implement across the board with little time or money
would be showing appreciation, developing standard career paths, and opening the
lines of communication.At JDA, we
conduct monthly meetings for employees in order for everyone to be kept
up-to-date, discuss any major issues, and reward those who have performed
exceptionally during the month.In
addition, we have developed standard career paths for each of our departments
and positions, which allow employees at all levels to envision and realize a
future with our company.

SAVING
EMPLOYEES = SAVING TIME & MONEY

By
implementing a formal retention strategy, you become a proactive manager who has
a plan for dealing with employee issues or preventing them altogether.By keeping employee issues to a minimum,
you can increase retention, reduce turnover, and ultimately save yourself the
time, money, and anguish that goes into finding new replacements.While it is realistically impossible to
save all your employees, you can reduce departmental costs significantly by at
least saving your key staff members.

JDA
Professional Services, Inc. is a leader in Houston’s IT staffing industry.In business since 1981, we recognize that the employment landscape is always changing. The
trends we've outlined will continue to present challenges for employers, but
they will lessen and strengthen over time.While we recommend a strong retention plan as the best option to reduce
turnover within your department, we also know that there will come a time when
replacing an employee is inevitable.In those times, we encourage you to take advantage of our vast experience
by relying on us to help you find the highest quality IT employees in the least
amount of time.To discuss your
current IT hiring needs, please contact JDA today at 713-548-5400.We wish you continued success, and we
look forward to hearing from you soon.

James Del Monte, CERS, CPCFrom modest beginnings in 1981, James Del Monte founded JDA Professional Services, Inc. which today is one of Houston’s leading IT staffing firms according to the Texas Association of Personnel Consultants (TAPC). Over his career, James has helped hundreds of companies build great IT departments by finding key individuals and providing excellent strategies for employee retention. In addition, he has helped thousands of professionals find great IT careers through direct placements and by providing valued advice and guidance. In November 2007, James joined an elite group of professionals becoming a Certified Employee Retention Specialists (CERS).

James is a board member of both the TAPC and the National Association of Computer Consulting Businesses (NACCB). He is a former president of the Houston chapter of the Association of Information Technology Professionals (AITP) and a founding member of the Open Door Education Foundation which provides scholarships to IT students. In 2006, he was awarded the TAPC community service award for his commitment to the community and charitable contributions.

As part of his commitment to the advancement of IT training in Houston, James is a regular speaker at various colleges/universities, trade groups, and job ministries, and he is often quoted as a subject matter expert for the IT staffing industry. Additionally, James serves on the advisory board for technology departments at the University of Houston Downtown, Westwood College, and ITT Technical Institute.

[1] Eric Chabrow, Damn the Economy! IT
Employment Rises to New Heights,